The other indexes took a day off to rest but the NASDAQ stretched its string to 11 consecutive days of gains.

Market Stats Table

The economic calendar was very light once again with only a couple reports. The weekly mortgage applications survey showed that applications rose +2.8% last week despite a rise in interest rates to 5.31% for a 30-year loan. Refinance applications rose +4% for the week.

The FHFA Purchase Only House Price Index rose slightly for May to -5.6% from -6.8%. This is a lagging report showing prices compared to May 2008. Prices on this report hit a low of -9% in November 2008. The index is down -10.7% from the high back in April 2007. This is a lagging report that is mostly ignored by traders.

The last report was the weekly oil inventories which showed a decline of -1.8 million barrels to 342.7 million barrels. This was the tenth weekly decline in the last 11 weeks and a drop of 33 million barrels from the 375.3 million barrel high. Despite the decline crude inventories are still 16% above year ago levels. Gasoline levels rose again by 1.2 mb to 160.5 million barrels. Distillates rose +0.8 mb to 215.4 million for the 13th gain in the last 14 weeks. Distillates are 25.3% above year ago levels. Refining utilization fell sharply to 85.8% from 87.8%. This is well below the mid 90% range we normally see this time of year.

Crude prices dropped fractionally to $65.41 for the first day with the September contract as the front month. With the rising gasoline/distillate inventories and the drop in refining likely to reverse the decline in crude inventories the price of oil should be dropping except for the impact of the dollar.

The dollar index declined to 78.70 and very close to the 7-month low of 78.33 set back in early June. Oil is seen as a hedge against the falling dollar. If the price of oil today was based only on demand and inventory levels the price would be a lot lower.

Dollar Index Chart

Crude Oil Chart

Earnings were still the focus for traders. Wells Fargo (Nyse:WFC) was the big dog leading the pack at the open with a monster earnings beat. WFC posted earnings of 57-cents compared to estimates of 34-cents. Earnings of $3.2 billion rose +80% over the $1.8 billion in the comparison quarter. Revenue rose to $22.5 billion from $11.5 billion. Obviously there is something that does not compute. In this environment a bank does not double its revenue in a single quarter.

This is a result of the completed acquisitions of Wachovia and Providian over the last year. This is still a great earnings report since the Providian acquisition weighed them down with tons of subprime debt just as the consumer was imploding. Wells has rebounded from the market crisis and appears to be poised for a solid improvement. Wells said it loaned $206 billion in the quarter and the interest spread was 4.3% from their interest cost to interest received. They also added $700 million to loan loss reserves. The Wall Street Journal had an article on them today saying they needed to raise a lot more capital and increase reserves substantially. The Wells CFO disputed the WSJ claims and said they had no plan to raise additional capital. They already raised $14.2 billion and slightly over the $13.7 billion required by the Fed. Despite the great earnings WFC lost 90-cents on the day mostly due to concerns over the WSJ article.

WFC Chart

Another stock that reported great earnings and got hammered was Whirlpool (Nyse:WHR). Whirlpool reported $1.04 per share compared to analyst estimates for 51-cents. That was down from $1.53 a year earlier. Revenue was down from $5.08 billion to $4.17 billion. The stock gave up -10% today or -$5.59 on comments from Whirlpool that consumer demand for appliances was significantly lower in Q2 and that consumers were still putting off appliance purchases because of tight credit and falling home prices. WHR raised the bottom range on its full year guidance to $3.50-$4.00 from $3.00-$4.00 per share. Analysts were expecting $3.41 per share.

WHR Chart

Morgan Stanley (Nyse:MS) reported a third straight quarterly loss with another disappointing quarter. However, most of the earnings drag came from accounting for the acquisition of Smith Barney from Citigroup and the repayment of TARP funds. MS reported a loss of $1.10 per share on a drop in revenue of -11%. Excluding one-time items the loss was $1.37 per share. One analyst theorized that MS was about 6-months behind Goldman in posting a sharp uptick in profits. MS had reduced risky investments over the last year and their caution showed in the lackluster earnings. MS is reversing that stance for the coming quarters. Morgan's value at risk averaged $113 million for the quarter while Goldman's was $245 million. The value at risk is the maximum loss faced on 95% of its trading days for the quarter.

Morgan Stanley Chart

Homebuilder (Nyse:NVR) reported earnings of $6.79 per share and blew away estimates of $4.11 per share. Despite the strong earnings the revenue was down -34.6% from the comparison quarter. However the street loved the report because they said new orders in Q2 rose +2% over 2008. The cancellation rate fell to 14% from 19% and inventory of homes fell by 16% on a unit basis and -27% on a dollar basis. Analysts immediately began claiming the NVR results were evidence the slump in the housing sector was nearly over. While that may be an exaggeration NVR's stock price did benefit with a $29 gain. Before you get too excited you should look at the chart. NVR stock is trading near $600 so a $29 gain is only +5%. There are only 6 million shares outstanding and no options. This is a Berkshire want-to-be.

NVR Chart

After the close (Nasdaq:EBAY) reported earnings of 37-cents that beat the street by a penny. Revenue of $2.1 billion was slightly over the street estimate of $1.99 billion. Their guidance for Q3 was 34-36 cents and the street was looking for 35-cents. Revenue fell -9% with Ebay marketplace sales falling -14% while PayPal earnings rose +11%. The Ebay marketplace includes auctions, shopping sites through Ebay stores, Stubhub ticket sales and classified ads through their Craig's List subsidiary. EBAY stock rallied sharply in after hours as shorts scrambled to cover after anticipating a bigger decline in earnings.

EBAY Chart

An after hours disappointment was Qualcomm (Nasdaq:QCOM). QCOM reported earnings of 54-cents compared to street estimates of 52-cents. Revenue was slightly lighter than expected but QCOM raised guidance for the coming quarter saying demand was healthy and shipments strong. Unfortunately QCOM's raised estimates for Q3 revenue of $2.65 billion was still below the street estimate of $2.73 billion. The QCOM report was a good report but after Intel's earnings everyone else in the chip sector has paled in comparison. QCOM shares fell -2.50 in after hours.

QCOM Chart

SanDisk (Nasdaq:SNDK) reported earnings of 36-cents compared to analyst estimates for a loss of 16-cents. This was a great quarter for SNDK and flash memory has risen +40% over the last quarter. However, revenue fell -10.5% due to a lower volume of sales. SanDisk and others had cut capacity when the recession started to preserve margins and that capacity cut was responsible for the rise in prices. The CEO said the company and the sector were well positioned for the future with a balance of capacity and products that would remain profitable as the mobile computing market and smart phones continued to grow. It was a good report but the stock was punished with a $1 loss in after hours after a 50% rally over the last month.

SanDisk Chart

Dow component Boeing (Nyse:BA) reported a +17% rise in profits but cautioned it was still assessing the financial impact of the latest delay in the 787 Dreamliner. Boeing announced last month that the airplane needed stronger reinforcements for its wings after cracks were found in the supports. They claim fixing it will be straightforward and require a limited number of parts but it was the fifth delay that has pushed the initial deliveries back by more than two years. Boeing is going to suffer billions in penalties for late delivery and in increased costs. Boeing said 52 planes were cancelled but they received new orders for 57. So far in 2009 73 orders have been cancelled but over 850 remain. Earnings for Q2 were $998 million or $1.41 per share. Analysts expected $1.21 per share. Boeing declined -$1 on the earnings news.

Boeing Chart

The Dow was also handicapped by the continued decline by Coca Cola (Nyse:KO) after their earnings on Tuesday. The company posted earnings positive earnings of 88-cents compared to 61-cents in the comparison quarter. Unfortunately the comparison quarter had 40 cents in charges making the Q2-09 earnings actually a decline in profits. Coke has declined for two days and put pressure on the Dow.

Coke Chart

Goldman Sachs (Nyse:GS) announced today it was buying back its TARP warrants for $1.1 billion. Along with the $318 million in dividends that equates to a 23% return for the Treasury Dept on Goldman's TARP adventure. This happened on the same day that a hearing was being conducted on getting the most return on the government's investment in the TARP banks. The $1.1 billion was still a discount but a lot more than Goldman wanted to pay. Goldman was hoping to buy them back for under $500 million. A bipartisan Congressional committee complained last month that the Treasury was shorting taxpayers by as much as $2.7 billion by discounting the warrants. A hearing on that was conducted today.

Online shoe retailer Zappos.com announced a couple months ago that they were going to ramp up their online business and launch a new shopping website called Zeta. This was seen as a new attack on the leader of online shopping Amazon.com. Today Amazon (Nyse:AMZN) announced it was buying Zappos.com for $807 million in stock. I guess when you are Amazon the game plan is buying every competitor whenever they develop enough scale to be a threat. Amazon has done this numerous times and buying Kappos for 1/40th of Amazon's current market cap is just another snack for the retail giant. Amazon gained a $1 in after hours. Amazon reports earnings after the bell on Thursday.

Major earnings due out on Thursday include Microsoft (Nasdaq:MSFT) Amazon (AMZN) American Express (Nyse:AXP) Broadcom (Nasdaq:BRCM) Capital One (Nyse:COF) Juniper (Nasdaq:JNPR) McDonalds (Nyse:MCD) 3M (Nyse:MMM) and (Nyse:UPS).

Other things to watch for on Thursday include the Jobless Claims, which are expected to spike back up to 565,000 from 525,000 as the summer doldrums weigh on jobs. Also, at 11:AM the government will announce how many notes of various durations they will auction the following week. Estimates are for $113 billion in 2s, 5s, 7s, and TIPS.

Chrysler announced today it was doubling the government's Cash for Clunkers program. The government will give you $3500 or $4500 credit for trading in your own car to buy a new one. There are some rules, actually a lot of rules as you can see in the flowchart below. Chrysler will give the buyer an additional $4500 credit for up to $9000 total off the price of a new car.

CFC Flowchart

Image Copyright 2009 Pasch Consulting Group Inc

The Nasdaq stretched its string of consecutive gains to 11 days. Strong gains in Apple +5, Starbucks +2.69, Onyx Pharmaceuticals +6, Bankrate +4 and Wynn +2.50 helped to overcome the earnings losers and pushed the Nasdaq Composite to a +10 point gain. This pushed the Nasdaq even farther above the prior resistance at 1900. The Nasdaq has not seen a string like this in over a decade. Obviously this string will eventually come to an end and futures are down again tonight. The Nasdaq has shaken off repeated problems to extend this string. How long it can last is anybody's guess but it is very over extended. The Ebay afterhours rally should be cancelled out by the drop in Qualcomm so tomorrow is another tossup.

Nasdaq Chart

The Dow finally gave up a few points. It was minimal and not a confirmation of anything. The Dow was down because IBM, KO and BA were down along with 12 other stocks. The Dow was evenly split with 15 decliners and 15 advancers. Relatively speaking a -38 point Dow loss was pocket change. Dow 8900 came back into play but without any material volume to matter. The range to watch is support at 8800 and resistance at 9000. If 8800 breaks then we could see a material bout of profit taking. If support at 8800 holds then the next bounce should take us over 9000. That is a lot of ifs but those are the facts today.

Dow Table

Dow Chart

The S&P has struggled for three days to move over 950 with conviction and has so far failed in that attempt. The intraday spike to 959 today lasted only a few minutes before sellers again took control. However, we can't claim they did it with conviction since the index was only fractionally negative. I believe the closer we get to Friday's close a larger move will appear. Bulls are holding their gains but the sellers have not given up. Support is well below at 880 and the next resistance level is just over 1000. That provides a considerable range for the rest of the summer.

S&P-500 Chart

The Russell 2000 fund manager sentiment indicator actually gained +3 points today but it remains less bullish than the Dow and Nasdaq. The Russell internals show the new 52-week highs peaked at 46 on Monday and have fallen to 26 today. This suggests the rally in the Russell is peaking and managers may be trying to ease out of some of the winners. Volume on the Russell fell to the lowest level this week at 740 million shares. It looks like managers are just sitting on their hands waiting for a direction to appear. Resistance is 530 and the brief intraday high was 531.

Russell 2000 Chart

The common refrain from the tech bubble in 2000 was "trees don't grow to the sky" meaning every rally would eventually end. The Nasdaq is up 11 straight days and eventually this rally will end. The key is not trying to pick the top but in deciding what to do once it ends. Will a 50-point decline signal six more weeks of summer doldrums or will it simply be a buying opportunity for the fall rally? I am betting that the next decline however long or brief will be an entry point for a fall rally.

We are seeing earnings improve. Despite many complaints about "Q3 will be very tough" there are an equal number saying that the economic activity is improving. This is leading edge normal. Those with products the rebounding economy will buy first are seeing a brighter future while those with longer cycle products are still in the dumps. What almost everyone agrees on is that the worst is behind us. Even Dr Doom said on CNBC this week that the worst is behind us but he is still predicting a slow recovery.

Fund managers were under invested in March when the rally broke out. Many sat on their hands in hopes of a new entry point. From June 5th to July 10th the markets declined ever so slowly until they appeared ready to implode on Friday July 10th. Fund managers were eagerly awaiting that implosion so they could finally get back into the market with more than a token position. When Meredith Whitney surprised everyone on Monday the 13th with a reversal from bearish to bullish on the banks she covered the short squeeze began. Fund managers were probably following stocks down with buy stops just so they would not be shut out again if another explosive rally began. When it began and Intel added fuel to the fire last Tuesday there was not only a rush by traders to cover shorts but a move by fund managers to add to positions just in case that 4-week decline was the last one this year.

Obviously this is just speculation on my part after listening and reading dozens of analyst reports. It does sound like a plausible scenario and if correct it means any future dip is likely to be bought. That could be a three-day dip or a three-week dip but I suspect we will be able to tell pretty quickly. This has turned out to not be a normal summer for tech stocks and that is causing grief among the cycle traders. Techs should continue to rebound first out of the recession and that is another reason the Nasdaq refuses to give back its gains. The sentiment of the market has changed. I can't imagine what would make it bearish again long-term but there will probably be several short-term events. Personally I would love to see a sharp multiple day decline to put some risk back into the market. That would provide another entry point for longs and we could see the next wave of buying begin. Being bullish ahead of the normally bearish August-October season is contrary to conventional wisdom. That should allow several more cycles of short covering as the bears jump on every dip as the next big decline. Let's hope they are proven wrong.

Jim Brown